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Flat Rate VAT: Small businesses shouldn’t be collateral damage

One of the few surprises in the 2016 Autumn Statement was the announcement of planned changes to the Flat Rate Scheme for VAT (FRS). The change in essence hikes the tax burden on many businesses that meet a new definition of being ‘limited cost’. As I’ve mentioned in my blog of the proposal’s full details previously, they are due to come into force from April 2017.


Let’s look at a quick example: For Joe, the owner-director of an IT consultancy with £43,000 annual revenues, these changes amount to paying £826 more tax for the next year. This piles in on top of the changes brought in to increase dividend tax rates from 2016 which will have already cost Joe an extra £1,505 extra tax each year.


The government’s impact analysis yet again fails to meaningfully consider how this change will affect micro-businesses. This is utterly woeful as the lack of decent impact analysis has been repeatedly flagged in my private meetings with government officials and in several Parliamentary debates.


From correspondence with HMRC I understand that the driver for this change is the estimated 30,000 additional FRS registrations recorded in the last year – above and beyond the usual trend. HMRC believe them to be bogus registrations created by employment agencies to profiteer from the scheme rather than representing genuine businesses.


The bogus and abusive use of a scheme aimed at simplifying tax for small businesses is outrageous and unacceptable. We absolutely support enforcement and closing loopholes to ensure everyone pays their fair share. But the entire micro-business sector should not be the collateral damage in closing a loophole.


So what should we do?


Accepting that the abuse has to be stopped, we can at least make a positive proposal:


The test used on whether to apply the new ‘limited cost business’ flat rate needs substantial revision to include services and properly target bogus registrations, not the majority of law-abiding businesses.


We have made this suggestion to HMRC in our consultation response, and we will be making the case to Government at every opportunity.


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